• Graham Harris

Has the future of carbon pricing in Canada just become more certain?

Following the "polluter pays" principle, the Federal Government in Canada has required a price on carbon since 2019. With the publishing of its "A Healthy Environment and A Healthy Economy" Plan in 2020, it also signaled its intent to steadily increase the price of carbon over the long term, stating:

"The Government is proposing to increase the carbon price by $15 per year, starting in 2023, rising to $170 per tonne of carbon pollution in 2030"

Since this announcement there has been much discussion in the low-carbon industry regarding how likely this proposal was to come to pass. Understanding the future price of carbon is an important question as Canada seeks to meet its decarbonization goals. The economics of any low-carbon investment - whether you a homeowner thinking about installing solar panels or a power company evaluating carbon capture technologies - can look very different under this year's $50/tonne price compared to next year's proposed $65/tonne price, never mind the proposed 2030 price of $170/tonne!

So, when the Government of Canada published its 2030 emission reduction plan in March 2022, I was very keen to see what clarity this plan brought to this issue.

But before we talk about this specifically, let's briefly consider what the purpose of the plan itself is, and the role of carbon pricing in it.

The 2030 Emission Reduction Plan sets out what actions the Federal government will take to meet Canada's 2030 GHG emissions reduction target, which is to reduce GHG emissions by 40-45% below 2005 levels. And make no mistake: this is a major undertaking. Consider that 2005 emissions were 739 million tonnes (Mt CO2e). This means the 2030 target is 406-443 Mt CO2e. In 2019 - the latest year for which economy-wide emissions data is available - emissions were 730 Mt CO2e - which means over a 14 year period, emissions have been reduced by only 9 Mt CO2e, or less than 2%. This is shown in the graph below.

As the Government put it themselves, reaching the target will therefore "require a significant increase in ambition across all economic sectors". As such, the plan includes a suite of actions across the following sectors

  • Buildings

  • Electricity

  • Heavy Industry

  • Oil and Gas

  • Transportation

  • Agriculture

  • Waste

However, it also includes a number of "economy wide" actions. The most significant of which is carbon pricing. This is given particular prominence in the plan and is explicitly identified to be "key" to achieving Canada's 2030 emission reduction target. Why? Because it will encourage decarbonization across all sectors of the economy.

Now, to return from this brief aside to our central question: what does the new Emissions Reduction Plan say about carbon pricing and the lofty goal of $170/tonne that was proposed in 2020? Check this out:

"Starting in 2023, the price will start rising by $15 per year until it reaches $170 per tonne in 2030."

That's right. We just tripped a linguistic threshold and have moved from "proposing" to "will". That's a fairly major tightening of language and represents a considerable increase in certainty. However, this is politics, so it would be naïve to say that this is a guarantee - times change and so do political parties.

Perhaps recognizing this themselves, the new plan also briefly touches on three other connected issues regarding price certainty:

  1. Contracting price certainty - the plan floats the idea of guaranteeing carbon prices for investments through a contractual mechanism (known as CCFD, or "carbon contracts for differences" - yes, it's yet another acronym to remember!). The idea of CCFD is to future-proof low-carbon investments now against the possibility that planned price increases do not materialize (due to, for example, a change in Government), thus making it easier to make those investments. As the CBC reports, this idea is being welcomed by industry (see here). However, it seems that CCFD is likely only to apply to large capital investments so it does have the potential to create a two-tier carbon price environment, where large companies are protected from the fickle nature of political winds, but not smaller companies or individuals.

  2. Legislating the carbon price - no detail is provided, but the plan notes that the Government intends to "'[explore] legislative approaches to support a durable price on carbon pollution."

  3. Finally, its important to remember that in most of Canada, the system that regulates carbon pricing for industry - the Output Based Pricing System (OBPS) - isn't actually the Federal system but "equivalent" provincial regulations (such as TIER in Alberta, for example). While there is no guarantee that provinces will adopt the same pricing approach (there are other ways to demonstrate equivalency) - however, the Federal Emissions Reduction Plan notes "that provinces and territories [will need to] update their carbon pollution pricing systems where necessary to align with the strengthened benchmark [the increased carbon price]", indicating that their negotiating position is to expect price matching within the provincial systems.

In summary, is $170/tonne by 2030 now a certainty? While that might be a stretch, it is a lot more likely than it was, and it does seem almost certain that in the near term the price the "polluter pays" is only going to get higher and higher.

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